Shiller on Housing Bubbles

The NYTimes has a good but wordy piece on Shiller's assessment of the US housing bubble. At the core of his analysis is a real price index of housing, an index that looks at the changes in price of the same home over time. Most price indices look at average home price and try to correct for changes in size and quality, but Shiller counts the same homes and therefore needs to correct less.

As you can see above, housing has remained remarkably stable in terms of % income it consumes. Despite cries of land getting scarcer etc., housing prices have remained flat in real terms. The exception is the last few years where you see a dramatic rise in home prices. If you superimposed an index of rents, you would see a line that remained flat to declining from 1890 to the present day. The dramatic increase in real prices and the change in rent/purchase makes me beleive that we are in a housing bubble and will see a decline in real prices.